January 19, 2006
Whatever happened to tax reform?
Posted by Victor Fleischer

Beth Garrett is speaking at our Tax Colloquium this week.  (Paul Caron has more details, along with a link to the readings, here.)

Beth was a member of the tax reform panel, which issued its final report in November.  Remember? No? 

As my colleague Bill Klein remarked to me yesterday, the final report was like a meteor, a shooting star that dashed brilliantly across the sky, giving us a sense of wonder about what might be before disappearing forever, vaporizing in the atmosphere before it ever even touched the ground.  Now we wonder if it even really existed at all, or was just an illusion. 

I attended a couple of Brookings panels while I was still in DC last semester, and I've got lots of questions for Beth.  In my mind, the short version of what happened is that the panel had some great people (e.g. Beth and Jim Poterba), which led to a final product that reflects (1) great tax policy and (2) because the report is great "pure" policy that doesn't reflect politics, it was politically dead from the beginning.  Below the fold, more details and my questions for Beth, for those who are interested. 

I hope to ask Beth a number of process-oriented questions as well as some substantive ones.

1.  The Panel.  Is an expert panel a promising way to accomplish tax reform?  I wonder if, before there's any realistic hope of tax reform, we would first need to get public commitments from the key members of the House and Senate, as well as the President. 

1a.  Did the panel take into account politically powerful groups?  Or did it just try to come up with the normatively best policy, even if it was politically dead-in-the-water?

1b.  Did public meeting laws cripple the process?   My understanding is that the panel was divided in half so that at least the smaller groups could meet privately.  Would more back-room meetings have helped?

2.  Progressivity.  Why did the panel assume that the 2001 and 2003 tax cuts would be made permanent?  By assuming that the tax cuts will be made permanent, the panel report deceptively (if unintentionally) suggests that it's progressivity-neutral, when in fact it's regressive vis-a-vis current law (i.e. if one does not assume that the tax cuts are permanent, but in fact might expire).

2a.  Your statement suggests that it's vitally important for us to think about increasing progressivity and raising more revenue, not withstanding the decision of the panel to focus on structure.  If you had a limited amount of political capital to spend, which would you focus on: progressivity, revenue, or simplification?

2b.  Credits.  Maybe the most striking thing about the report is its expansion of the use of credits vs. deductions.  This is great tax policy.  But isn't also bringing in progressivity through structure rather than through marginal rates?  If so, and if the proposal is maintaining the status quo distribution of tax burdens, then where is the money coming from? 

3.  Consumption Tax.  Did offering more than one option (as required by the President's mandate) doom the report?  Would a consumption tax have had a better chance if there were no simplified income tax model?  Should tax academics stop spilling so much ink over the consumption tax?  Should we assume that the closest we'll get is a hybrid system?

4.  Housing.  How did the panel deal with the political importance of the housing and real estate industry?  The panel made some significant reform suggestions -- enough to get the industry mad -- but stopped short of saying that we should not subsidize owner-occupied housing vis-a-vis renters.

4a.  Did the panel worry about the housing bubble?  Is the country now hopelessly addicted to the housing subsidy?  I'd worry that the reform panel's suggestion might pop the housing bubble, even with a five-year phase in.  (The tax change would be capitalized in the sales price of homes immediately, after all.)

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